Fuel prices set for potential ₹2-3 cut as marketing margins improve: ICRA

Recent improvements in marketing margins for auto fuels indicate a potential ₹2-3 per litre reduction in petrol and diesel prices, according to ICRA. As crude oil prices decline, expectations for lower retail prices have risen, especially since rates have remained largely frozen for over two years, with the last reduction of ₹2 occurring in March.

In its note, ICRA estimates that, as of September 17, oil marketing companies (OMCs) were making nearly ₹15 per litre more for petrol and ₹12 per litre more for diesel compared to international product prices. This higher net realisation could pave the way for retail fuel price reduction if crude prices remain stable.

The improvement in marketing margins for Oil Marketing Companies (OMCs) has been largely driven by a significant drop in crude oil prices in recent months. This decline is attributed to weak global economic growth, rising US oil production, and reduced demand from key markets like China and Europe.

ICRA's analysis shows that the crude basket averaged around $74 per barrel in September, down from $83-84 per barrel in March. As of writing, Brent crude stood at $70.69, down 3% from last session. Earlier this month, global oil prices fell to their lowest levels in three years amid ongoing concerns over demand. International oil prices are critical for India, as the country imports approximately 85% of its total energy needs.

In China, demand has been impacted by rising electric vehicle (EV) sales, muted industrial demand, and a slowdown in the real estate sector. Europe has also seen weak demand due to sluggish industrial activity and a shift towards EVs in vehicle fleets. The price decline further, accelerated on September 3, following news of a potential deal to resolve the dispute halting Libya’s crude production and exports. This news compounded earlier losses driven by weak Chinese economic data.

ICRA notes that a marketing gain of ₹1 per litre on both petrol and diesel can offset the loss in Gross Refining Margins (GRMs) of $0.9 per barrel for India’s domestic refining and marketing sector. This is evident in the healthy operating margins reported by OMCs in FY2024 between April 2023 and March 2024, despite a moderation in GRMs.

While this higher marketing margin benefits Oil Marketing Companies (OMCs), standalone refiners that focus solely on refining without retailing, may face profitability challenges as they do not benefit from these marketing gains and will feel the direct impact of declining GRMs.

Although petrol and diesel prices in India are deregulated, giving Oil Marketing Companies (OMCs) the freedom to adjust rates, state-owned retailers such as Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL), and Hindustan Petroleum Corporation (HPCL), have rarely exercised this freedom since late 2021. They stopped daily price revisions in November 2021 when rates hit an all-time high, prompting the government to reduce excise duties.

After a brief hike of ₹10 per litre in March 2022 due to the war-driven spike in international oil prices, subsequent excise duty cuts rolled back the increases made during the pandemic. This led to a price freeze starting on April 6, 2022, which continued until March 2024, when a ₹2 per litre cut was introduced. Currently, petrol is priced at ₹94.72 per litre and diesel at ₹87.62 a litre in the national capital.

Earlier this month, on the sidelines of the International Conference on Green Hydrogen, Pankaj Jain, Secretary to the Union Ministry of Petroleum and Natural Gas, mentioned that state-run oil marketing companies (OMCs) might consider reducing fuel prices. He noted that oil companies and the government would analyse price trends over a longer duration.

In light of the recent slump in oil prices, on September 17, the Centre even cut the windfall tax on domestically produced crude oil to zero per tonne. This change provided relief to state-run oil marketing companies and private players such as Reliance Industries and Adani Total Gas.

Additionally, in OPEC’s September report, the rise in world oil demand stood at 2.03 million barrels per day (bpd), lower than its previous forecast of 2.11 million bpd, which was largely attributed to a reduction in expected growth in China, which was revised from 700,000 bpd to 650,000 bpd.

The government, however, is expected to offset any potential fuel price cuts with an excise duty hike on petrol and diesel, to receive a revenue boost. Currently, excise duties stand at ₹19.8 per litre for petrol and ₹15.8 per litre for diesel, about 40-50% lower than their peak levels in 2021. While consumers may see some relief at the pump, this could be tempered by the excise hike, potentially squeezing the margins of Oil Marketing Companies (OMCs).

Petroleum, Oil & Lubricants (POL) consumption in India grew by 5% year-on-year in FY2024 and is expected to rise by another 3-4% in FY2025. This growth is driven by economic progress, increasing mobility, and rising air travel.

To meet this growing demand, Oil Marketing Companies (OMCs) have planned significant capital expenditure in the refining sector. According to ICRA, India's domestic refining capacity is projected to increase from 256.8 million tonnes in March 2024 to 306 million tonnes over the next three to four years. This expansion will support both increased consumption and exports. ICRA also anticipates that capacity utilisation of both public sector undertakings (PSUs) and private refiners will remain healthy in FY2025.